The IFC Review of Private Investment in Developing Count IF: : .A Spring-Summer 2000 -- Vol. * 23480 I~~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ . . j fi,-rl, I-C! ' S rThe IFC Review of Private Investment in Developing Countries IFC is a part of the World Bank Group supporting private sector development in member countries through investment, _ advisory services, and technical assistance. j ; International Finance Corporation Washington, DC 20433 USA IF C . ,, k 14K.l9. ' www.ifc.org E d i t o r S p r i n g S u m m e r 2 0 0 0 Vo I. 4, No. 2 Rob Wright D e s i g n Patricia Hord.Graphltk Design In this issue 1 To sum up IFC's strategy: focus on the frontiers. 2 Web of Discovery E-commerce can cut out those meddlesome middlemen who keep developing-country producers from capturing the full value of their goods. A lot is happening... Roundup 9 Human resources assistance; Syrian entrepreneurs. 10 Fleeing the Fire Local currency bond markets - great to have, but hard to get. South Asian economies have much to teach in this regard. 16 Tourists and Cities: Friend or Foe? Tourism can bring many benefits to historic urban centers - but many threats as well. How much is too much? Client Perspectives 22 Straight from Chicago A one-of-a-kind US small business lender becomes a perfect partner in Azerbaijan and Georgia. _ ~~~... _ 26 Transparent Waters Bucharest's water privatization -a model transaction, done with dogged determination. Tell us what you think! Fax: 202-974-4384 E-mail: Impact@ifc.org Pages 2-3, 16-17, 20 illustrations: The Image Bank Page 10 illustration: Michael Shechv All references to dollars are US dollars unless otherwise indicated. My , Frontier Focus Peter Woicke J udged only by income levels, Uganda and Korea couldn't be by investing and advising, often even attracting strong foreign partners much more different. Look beyond that, and they have some able to improve management, technology, and customer service, as xve surprising similarities. did in partnering with the leading South African financial institution ABSA in the recent privatization of Tanzania's largest bank. Uganda is very poor. But perhaps it doesn't have to be. As one of the world's most fertile nations, its agricultural potential is remarkable Small and Medium Enterprises: Small business is the key source of job and could support a far stronger economy. Yet today approximately creation, and the world is right to expect a huge effort from us here. 80% of the country's fruits and vegetables perish before they reach Whatever the need - raising financing, access to new technologies, or the market. Why? Because Uganda lacks adequate roads, warehouses, advice on writing business plans and developing new markets - IFC and distribution systems. Private investment could change this and has demonstrated models of success and will scale up its efforts to needs to be attracted. spread them farther around the world. Korea, in contrast, is an economic power, one whose consumer brand Information and Communications Technologies: The Internet is names are known the world over. But its key underpinning, the local dramatically restructuring traditional business models. Developing financial sector, is still far from fully mature, having nearly collapsed countries risk missing out on this fundamental economic transforma- under a mountain of ill-advised loans two and a half years ago. All tion unless they gain greater access and soon. but its biggest banks have had great difficulty raising new financing ever since. Well aware of the continuing risks, private investors need Social Sectors: Health care and education are two top priorities ot reassurance before they will help shore up a banking system that affects development and ones where we now see that the private sector has a every business in the country. surprisingly large role to play. We must help private investment com- plement traditional public financing in these key areas. This likely Cases such as these lie at the core of discussions about IFC's future means not just investing in schools and hospitals, but also health direction we have held this spring with our shareholding govern- insurance providers and pharmaceutical companies, student loan pro- ments. We can't do everything and would be foolish to try. But grains aind distance learnintg centers, and more. requests for IFC's services are growing every day, and we need a clear strategic rationale on which to base the many choices we face. We 'm excited about what can happen as we narrow our focus to the must step back and set a few key priorities so that we can provide frontiers. An effective small business program we've operated for global leadership in selected areas that make a real difference in the 14 years now, the African Project Development Facility, has recently fight against poverty. become part of a global Small and Medium Enterprise department we've just set up as a joint initiative with the World Bank. This wilt Much thought has gone into this dialoguer with our shareholders. From give the APDF access to many dynamic new synergies as it works with it has come agreement on one essential point: focio on1 the frontiers. Ugandan - and other - entrepreneurs. But that's not enough. We also need to start working in Africa with some of our best client B y frontiers, I mean those places where private capital is simply not companies, who so far invest mainly in higher-income regions. yet moving in any, .i.u, ,.r way, starting with the fragile B economies where instability or weak legal and regulatory climates The Korea of Hyundai, Samsung, and Daewoo is certainly not a fron- keep investors away. But frontier also applies to higher-incomc countries tier. But key parts of its still-dcvcloping financial sector are and need where some key industries or geographic regions are still severely under- our attention. I was proud to see Trade Finance magazine give a "Deal invested, often with disturbing social ramifications. This is where IFC of the Year" awvard to our initiative with Bank of America to attract must concentrate its efforts, doing all it can as a member of the World $150 million in nexv trade financing for crisis-affected Korean banks. Bank Group to spark new and sustainable investment flowvs. We need to apply just this kind of selectivity and innovation in choosing what to do in higher-income countries, which often still Within this broad focus, we will concentrate on five essential targets: have many needs the World Bank Group can address. When we worl in these large markets, it will now be almost exclusively in frontier Infrastructure: It is fundamental to conmpeting in today's global economy. regions and sectors. Whether one speaks of roads, ports, power, water and sanitation, or something else, experience over the past decade shows well-regulated, A number of the headlines from the developing world this year have long-term private investment can make major contributions. But it is been troubling. The economic and social needs loom greater than ever, not yet reaching enough people, and we must help push it farther and many of them in areas where IFC can provide leadership to help shape wider. That's why we now have advisory teams in ',. '. helping pri- the world's response. But we must grow both more creative and more vatize its troubled national airline and water utility in Lagos State. rigorous in choosing our challenges. IFC will become more effective through the sharper definition of its strategic focus that has emerged Financial Markets: As important as foreign capital is, 80% or more of this spring. Please hold us accountable for the results. - all investment in developing countries comes from domestic sources. Local banks, capital markets, pension funds, and the like must be built Peter Woicke is the execuitive lice president of IFC anLd a managing director up so that they do a better job at financing development. We can help of the WYorld Bank Impact Spring-Summer 2000, Vol.4, No. 2 s :aq 4jBiw jamsuD aI jo liDd 6!q V uD69q I1 I! ajGi/ Japuom pus vpoq °ool Aow am uoos AopaGwoS ioU GqAoW papoijj-ioJ -iuIaGul ay4 J9AO SBUliy 6uiIIes Aq A@uow uioa wa4 6u!dIaH 4noqy pIJom qI4 u' Ildood lsajood ey jo Gwos joj s4OjDw mau rnoqo s,41 A., 4 , '~~ ' .' , ' j Ihaos reigned. trade -one that could help bring the poor up, not take them There were more than 20,000 protesters in the streets, down. It was just her tactics that were different. j lambasting the World Trade Organization (WTO) and -- t the economic order it symbolized. Delegates trying to Three years earlier she and her husband had quit their pharmaceu- enter its Seattle meetings last fall instead ran into the biggest rtical sales jobs and set off on a 15-month trek through Asia and demonstrations in the US since the end of the Vietnam War. North Africa. They spent as much time as they could in X ,!l Marchers clashed with police, then fell back amid heavy use of living shoulder to shoulder with the very poor. tear gas and rubber bullets, with a small, violent contingent fast becoming the center of attention. Streets were blocked, windows Everywhere they went the couple sensed an overpowering dis- broken, fires set. The mayor then imposed all-night curfews in connect: people they met had great skills, but almost nothing to the city center, and arrests topped 500. A usually peaceful city show for them. Many could produce remarkable clothing, music, was scared out of its wits. food, and handicrafts - all items with great potential selling power in industrialized nations, if only they could get to market. The furor stemmed from a single issue: globalization. It was a system, opponents screamed, that left too many losers, most of "There was just so much incredible stuff being produced that I all the poor. thought to myself, 'These people are smart, creative, everything you could want. If they had the same access to opportunities Ironically, the frightcning television images of the "battle in that I had, they could be doing anything they wanted right Seattle" kept the world from focusing on the critical debate now,"' said Long, now 28. But they weren't. Poverty had instead behind the confrontation: what to do about all those ignored by robbed them of having almost any choices at all in life. the global economy? Nevertheless, among all that noise one quiet but compelling voice did emerge. It went almost entirely And the more Long looked into their high-quality workmanship, undetected, but it was one that desperately needed to be heard. the more she saw of opportunities blocked. "There was just no It was the voice of Michelle Long. And it talked about chains. knowledge sharing on critical issues like export finance, quality controlt, and how to find agents for shipping and marketing," Bright-eyed and full of dreams, Michelle Long agreed with the Long said. "Everyone was trying to do his own thing on a small protesters about the need for a new approach to international scale. It was all very inefficient." L~~ .g .- - 4T_ - --O-P r -wV '3= - -;ki -a-~~~~~~~~A 44~ PM~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~1 ~~~~ _ _ _,_' Web-Enabled: Michelle Long (right) and her partners at World2Market com. Impact . Spring-Summer 2000, Vol. 4, No. 2 A lot of people would have given up at this point. She did Amazon and other heavy hitters of e-tailing. It was enough. She not. "I wanted to do something about all this waste of human drove off through the protests to meet with World Bank/IFC potential," she recalled. President James D. Wolfensohn, one of the many dignitaries visiting Seattle at the time. Wolfensohn liked what he heard, r rv t giving her his encouragement and a long list of people to contact. Eventually she came home. But home was not what it used to be. She entered business school at the University of Washington By Christmas, World2Market was running 20% ahead of its just in time to witness the emergence of a local product that initial sales projections, finding new buyers in the world's most would soon become the pioneer of Internet-based shopping, lucrative market for many products from vulnerable low- Amazon.com. Unlike all the other bookstores in the world at the income communities - intricate beadwork by Mexico's time, it essentially had no physical existence. Its most valuable threatened Huichol people, coffee grown on small family farms asset was completely intangible -an electronic brand - but it in Costa Rica, even quilts hand-woven by widows in India's worked. Somehow, the new company had interested people who poorest state, Bihar. In each case, the company's combination were buying books from their computers. In a stress-packed society of two applecart-upsetting models, "alternative trade" and where free time was in dwindling supply, gaining instant access Internet-based distribution, allowed it to send the artisans who from home or work to 3 million books in publishers' warehouses had made products up to 40% of the final selling price - perhaps across the country sounded like a good idea to a lot of them. 10 times more than is usually the case. The former involved a commitment to fair wages, sound labor and environmental Times had changed. A new on-line economy was taking off, conditions, and long-term business relationships with low- with Seattle as one of its new nexus points. Vast fortunes were income artisans and farmers. The latter was based on rapid, being made, with a reported 21,000 employee millionaires at low-cost, two-way communications: on one end, American nearby Microsoft alone. Opportunities to cash in abounded. cyber-shoppers motivated by the stories they read in Still, the people she had met in the villages and the products World2Market's on-line catalog about the products' origins in they made never left Michelle Long's mind. Soon they were the impoverished communities and, on the other, producers now basis of a dot-com business plan that earned her and a small able to tailor their output in response to news of the latest group of partners financial backing from an A-list of Seattle trends in consumer tastes abroad. venture capitalists. Weeks before the start of the WTO meeting, her new Web-based business, World2Market.com, went live. It Much is happening. But the important thing, say experts on the did so with every intention of changing the world. root causes of poverty, is not what is happening to any one new dot-com. It is the net effect. The premise was to use the Internet's efficiencies not only to give US cyber-shoppers their first easy access to traditional 94 k n t 9 h lr1 products made by the poor in developing countries, but to do Michelle Long was not the first. Before her, there was Edna Ruth so in a way that put a far greater share of the final selling price Byler. An aid worker from Pennsylvania, she was impressed with in local producers' hands than did conventional export opera- the embroidery done by local women she met visiting Puerto tions dominated by middlemen. The speed and connectivity of Rico with the Mennonite Central Committee. She brought a the Internet, Long saw, had already changed everything about few pieces home to sell to her church friends - this was in 1946 supply and distribution chains. Now it seemed to have great -and eventually started a home-based business that would in potential to break some of the bonds of poverty as well, mainly time grow into Ten Thousand Villages, a nationwide network of by getting vital information about products, markets, and prices nonprofit stores across the US and Canada that provides vital, into the hands of talented people long cut off from it. fair income to third world people by selling their handicrafts and telling their stories. Although working without an on-line pres- Michelle Long: "We want to do two things: empower workers all ence, it now buys nearly $5 million worth of goods directly from around the world, and teach Americans there is a better way to disadvantaged artisans. Many of them are women, like one its shop. We want them to shop in a way that directly benefits poor staffer Larry Guengerich met in Vietnam. people without making any sacrifices in product quality or con- venience. The way to do it is to introduce new information He was visiting rural co-ops there that had already established everywhere up and down the supply chain, which is precisely a reputation as reliable sources of goods for other alternative what the Internet is so good at." trade groups. Six hours out of Hanoi, Guengerich met a woman making impeccable hand-woven scarves at her small When the WTO came to town last fall, all she had was her idea, family farm. For years she had been forced to thatch her own plus the credibility of her association with key early investors in roof, rebuilding it with great effort every year after the heavy Impact * Spring-Summer 2000, Vol. 4, No. 2 1 rains came. But with new income from sales of her weaving in $ ' 3 a Europe, she had bought her first steel roof. It was built to last F| for 15 years. ~v "She was very insistent about telling us that steel roof was put , .| on with her weaving money, not her husband's rice money," - ,. i' Guengerich said. "That's when I saw how earning this kind of * a new income can be such an empowerment tool for women. It is i As something that lets them be perceived as producers of something | of value. That makes them far less likely to be mistreated, whether by receiving unequal opportunities for education and other essential services or by other means." Artisans: Producers of beautiful goods, but often far from markets. The Vietnamese woman's weaving skills had taken a lifetime to acquire. Albeit in raw form, they represented one of today's output. Not surprisingly, it is someone else who usually captures most critical wealth creators: intellectual capital. Yet kept in the value in their wares - most often exporters who buy them isolation, unsupported by knowledge of potential markets and cheap and then resell at a healthy markup. how to reach them, they were worth little. She thus had to depend on being discovered by a concerned foreign NGO that what if ..? could offer her scarves to those who chanced to enter its But what if some of these same artisans instead suddenly started stores. Her problem, in many ways, was the same as that of getting e-mails informing them of the latest tastes of consumers Amazon's competitors and all other old-economy retailers: a in the US, where online shoppers now spend an estimated $167 distribution system designed to sell anything to anyone, rather million a year on specialty gifts? Would they, like other denizens than one that marketed tailored products and services to indi- of the digital domain, increase their earning power through vidual customers, then developed an ongoing relationship with "learning relationships" with their new customers, rapidly inte- them for repeat business. grating feedback into their production processes en route to making increasingly higher-value products? Such, at least, would be the analysis of Enterprise One to One, a prophetic work written in 1997, the year before e-commerce In a first step to finding out, IFC recently awarded a $50,000 inno- caught on. Co-author Don Peppers saw that business was about vation grant to a business-NGO partnership called the Virtual to be transformed by the Internet's ability to create an interac- Souk (www.elsouk.com). Launched in 1997, it coordinates local tive, hassle-free, ever-renewable chain between buyer and seller. groups' on-line sales of distinctive hand-made goods from North Africa and the Middle East. It too is reconfiguring the supply "If you really follow through on the principles of one-to-one chain, which in its case extends all the way to Taliouine, a remote marketing, then pretty soon your business objective becomes to mountain village in Morocco that lacks electricity, telephones, and find products and services for the customers whom you know, as running water but whose women make wonderful rugs. Until opposed to finding customers for the products that you have on recently, they worked in a knowledge vacuum, having no choice hand," Peppers says. "The one-to-one marketer takes the entire but to sell the rugs for a pittance to a middleman who would likely marketing proposition from the other end of the binoculars, pass them on to foreign tourists in Marrakech for four times as looking at it from the customer's perspective." much, pocketing the difference himself. The experts say this backward vision lies at the base of all Today these rug makers make rugs on an exclusive supply con- good e-businesses. It is one, they say, of using technology as tract for the Souk (Arabic for "market"). It acquires them by the information corridor, the entry point for assembling new collaborating with a local community development NGO data and then rearranging it in hitherto unimaginable ways to called Ait Iktel that has long supported income-generating help producers anticipate their potential buyers' choices early activities in Taliouine, using it as a source of rugs it can in and reshape their offers accordingly. turn sell for more than $200 apiece via the Internet in the US and Europe. Since the NGO intermediary does not want to It sounds great. But it has so far barely touched the millions of make a profit and its customers are willing to wait five weeks artisans across the developing world, who for the most part pro- for delivery, not 48 hours, the Souk can send an even larger duce their painstakingly crafted items with no market research, portion of the selling price back to the village women than no knowledge of pricing structures, and no easy way to scale up World2Market would. Its goal, however, is not so much to r.- * Impact . Spring-Summer 2000, Vol. 4, No. 2 cater to the West's interest in exoticism as to raise incomes to us?' Increasingly, a much larger share of the money being while helping preserve an irreplaceable part of the local cultural made in e-commerce is going to be made on the wholesale mosaic. Many in the trade have seen ancient skills of craftsman- side. If you're looking to make an impact on local people's ship die out because of the younger generation's lack of interest, lives, you've got to be aggressive in going in that direction." and what remains may also vanish unless proved economically worthwhile to retain. final destination But then what? How far will all this effort go in giving talented "It's much better if this process can help these women reestablish but poor people new ways to earn money -money for their their presence and negotiate better terms for their goods locally, families' needs for food, housing, health care, and other essentials because that's where the majority of their sales will always be," rather than being further marginalized by thc forces of global- says Maurice Hasan of ization that the Seattle protesters railed so strongly against? W@X, a French software company involved in the Unfortunately, probably not very far unless more artisan groups Souk. "If they can tell can gain the basic skills that all exporters need, such as knowi ing the middleman the prod- how to finance, account for, and ship their goods without loss due ucts are selling well in to damages. These can be tough goals for communities with high r. ~ 'the US and Europe, they illiteracy rates to meet. Without outside . ri. r . to introduce this _ - - should then be able to knowledge, many fear that already-rich traders will reap most of get a better price for the gains from the e-commerce revolution. them as well. And if something is seen as hav- In a preemptive strike, World2Market has joined a team led by ing local value, it doesn't Miami crafts importer Culturas del Sol that recently won a just become a tourist World Bank grant to start a mini-MBA program for artisans. - 7 r 9; - item and a relic of the Working closelv with partners in Peru and elsewhere, the group 6. M " past. If we can transform is currently developing a curriculum for culturally appropriate, these crafts into some- community-based business training to be offered in local Ian- ZS~#te^, ~w >,x,~ thing for day-to-day use, guages on a cost-recovery basis. The goal is to increase craft connecting them with producers' control, l (f i, - them on-line access to up-to-date ocal people's desire for market and trend reports, importer directories, leads on partnering authentic products, then organizations, even the ability to post photos of the goods in you enter a very interest- virtual wholesale trade shows. ing market." If the initiative creates new networks, using the Internet's uncanny Having sold more than $500,000 of goods last year, the Souk is ability to generate synergies, it might he a winner. After all, now using its IFC grant to explore replicating its highly decentral- adding a digital overlay to the Moroccan NGO's long-standing ized model in Asia and Latin America. As with most start-ups, its work in the villages made a difference. And World2Market has IL ' - i UL- lies in reaching the necessary economies of scale to improved renowned Bangladeshi microfinance institution make an effective contribution. But the potential exists. A small Grameen Bank's ability to sell its borrowers' $30 silk shawls in the chain of development-themed boutiques in Italy akin to Ten US. The plucky dot-com is also passing on market data encourag- Thousand Villages has already placed an order for 400 pottery and ing Grameen to leverage irs silk production capacity to produce woolen items from one Moroccan' I I ,' . enough to make quite a other goods, such as tablecloths. Effective cross-branding could difference in the local economy. It is just that kind of wholesale allow Grameen to become a "one-to-one enterprise" and sell new link with conventional bricks-and-mortar stores that the Souk silk products to many of the same people that now btiy its shawls. sees as the most promising card in its hand. Consumers across America who might never travel to such "What will really make a change in people's lives out of this is distant locales or frequent a specialty craft store are nevertheless not the business-to-customer side, but the business-to-business drawn to a well-designed Website where such purchases are just side," says the project's founder, Tunisian-born World Bank a mouse click away. For that reason Amazon - which long ago official Azedine Ouerghi, who is working with IFC's Khanh stopped being just a bookstore and is now an on-line megamall Nguyen and others on the effort. "In other words, it's like hav- able to help its 17 million customers buy virtually everything ing a J.C. Penney come to us and say, 'We would like a large recently invested $17.5 million in eZiba.com, a World2Market order of these items. How long will it take for you to get them competitor an Indian woIlan an(d her US partner launched last Impact * Spring-Summer 2000. Vol. 4. No. 2 [ZZEEJ November at the MASS SME-commerce i_-4 J t MoCA contemporar-y art museum and high-tech s A rj . = < icenter in North Adams Big business in the developing world may have its snappy Web Massachusetts. In the pages to show the rest of the world. But small business drives local economies, and there access typically remains limited at best at a incredibly intangible time when the Internet is creating a single global market of 300 I . _ 'nternet world, where million networked consumers. | r 4 s _ potential is everything, Unless viable solutions emerge, If _., Amazon was clearly /j) many local companies risk intrigued by the falling behind as their markets Tunisia Online: The IFC-supported prospects of eZiba, home _ rapidly open up to increasing Virtual Souk helps artisans from North to "one of the best sites foreign competition. African villages find new buyers. on the Web," according to Time magazine. To bridge this gap, IFC venture capital is helping launch a new start-up offering affordable on-line resources tailored to the Take the news as confirming "From Places to Spaces," number needs of Philippine small and medium enterprises (SMEs). seven in the New Rules for the New Economy devised by Wired Called PBEC.com, it will give clients the Web-based business magazine's founding editor Kevin Kelly: "As physical proximity solutions they need to grow. For a one-time fee of about $150 (place) is replaced by multiple interactions with anything, any- plus a $40 monthly service charge, it will offer access to elec- time, anywhere (space), the opportunities for intermediaries, tronic storefronts, industry knowledge resource centers, and middlemen and mid-sized niches expand greatly." electronic data storage. Market research reveals some 23,000 Philippine small businesses well-suited to these activities: retail- How wonderful if success were all so simple! But the legions of ers, furniture makers, construction companies, and the like - all recent dot-con failures show that many of these opportunities potentially able to benefit from posting their own product cata- can end in disaster. High-profile on-line grocers, pharmacies, logues or talking to industry peers in secure chat rooms. and music stores have been losing serious money lately, thanks Harnessing one of the key advantages of the Net - the ability to ill-conceived strategic plans, overspending on advertising, to reduce transaction costs - PBEC.com will help build clients' poor customer service, and various other practices known to be profits, not only by launching Web pages to tap new markets, deathly to any business a century or more ago. Well aware of but also by gaining easy access to on-line services such as the pitfall, World2Market, like the Virtual Souk, clearly sees its accounting, payment processing, e-banking, and technical mission more as one of wholesale than retail and has no desire support that otherwise can be costly for small companies to to become a "dot-bomb," boasting of things it can't deliver. Tom obtain on their own. It will also offer them a free on-line Phillips, who left a successful product development career at resource center containing relevant industry news and informa- Nike to head up its marketing operation, finds this year's finan- tion, plus time-saving tools for critical needs such as writing cial meltdown in his industry extremely healthy, proving to the business plans and analyzing financial statements. world what the Internet really is: an all-new platform for doing previously unimaginable kinds of business, not just a fun new "Strong communications infrastructure and a technology-savvy way to try repackaging old ones. population make the Philippines a good choice for introducing this service," says IFC's Ravi Vish. "But if successful, the same "The most important sign I could ever put up on my wall is one model could also be used with other partners in several different saying: 'The best definition of insanity is doing the same exact countries." thing and expecting different results,"' he says. The primary sponsor of the $1 million project is Planters Bank, a mid-sized Philippine lender that has long been focused on IFC's grant to the Virtual Souk aims to help the project expand lending to small businesses and recently began using the new into other regions while holding fast to its goal of directly acronym PBEC for its "Planters Bank E-Commerce" activities. involving producers rather than merely supporting the trading Technical support comes from VICOR, a California-based middlemen. It is just one of several ongoing efforts within the e-commerce solutions provider that introduced this model with World Bank Group to ensure cooperation among all these differ- Bank America in the mid-1990s. Among the portal's content ent e-ntrepreneurs reaching out to the artisans of poor countries. providers are two other Manila-based alliance partners, the The story is still young, but with every new partnership forged Asian Institute of Management and the Philippine Chamber of the prospects increase for making better use of the resources and Commerce. IFC is investing $250,000 in the new company and information that drive this high-powered new approach to will hold a seat on its board. getting goods to market. E - Annabel Biles *=l Impact . Spring-Summer 2000, Vol. 4, No. 2 R d U N D U P Successful businesses rely not just on financial capital, but on human capital and effective management as well. To grow, they _,s .; -, must invest considerable time and effort in their people. That's why IFC, although known primarily as a development finance A institution, has recently begun supporting selected companies on a pilot basis with human resources (HR) management. Under the leadership of Karl Voltaire, director of the Latin America and the Caribbean Department, IFC is offering this new F . ~~-. service not only to companies in that region, but - thanks to a $150,000 Italian Trust Fund grant - to others in Sub- ± Saharan Africa, the Middle East, China, India, and elsewhere as well. One firm receiving this service is Puras, a fast-growing Brazilian food service company active in the country's impoverished Puras: Brazilian food Northeast. Its staff has increased from 800 to 5,200 in the last decade and is expected to reach 20,500 by 2005, providing service firm that puts many jobs for low-income women. The local owners' priorities include both establishing a common corporate identity and its people first, carrying out consistent policies for recruitment, management development, training programs, and service delivery. As a result of IFC's input, they have recently appointed the company's first two HR professionals and begun carrying out a comprehensive strategy for people management. IFC expects to provide them with a tailored training course in August to help realign the company's HR management policies in ways that should bring many benefits during this high-growth phase. Challenges of a different sort arise in post-Communist economies, where new owners of privatized companies often must develop effective HR management strategies to survive. Seament is an industrial group in Albania that produces and trades cement, owned by a Lebanese family that acquired the dilapidated state-owned Elbasan Cement Factory in 1995. While they have achieved significant improvements in worker safety and in moving potentially redundant staff to new jobs, much still remains to be done in negotiation of employee salaries and other areas. As part of its assistance, IFC plans to help Seament management establish a new compensation structure linked to the company's finances and productivity rather than just negotiation with unions. "There is a saying in the HR field about productivity - 'Money and technology make it possible, but people make it happen,'" says Paolo Gallo, IFC's project manager for this new service. "In this work we try to support our client companies in managing their people as their most important asset, which is the key to enhanced productivity." Momentum for private investment in Syria is quietly building. Thanks to a gradual opening of the economy, a less distorted exchange rate regime, and other factors, private sector activity today accounts for about 60% of GDP, up from F , I 25% a decade ago. In a show of support, IFC recently made its first investment there, financing a local irrigation equipment 9 4 . - manufacturer whose products help conserve precious water resources. : imb IFC is taking a $1 million equity stake in Arab Drip Irrigation Technology Company Ltd. (Adritec Syria), a company whose sophisticated pipe and tubing systems deliver drop-by-drop applications of water to plants in ways that can cut the need . for water in irrigation by up to 70%. If properly managed, drip irrigation can also reduce soil salination, a major problem in Adritec: Syrian Syria, and help increase farm yields. At the same time, the system can improve farm labor productivity and reduce irrigation equipment demand for potential pollutants such as fuel and fertilizer producer with a bright future. This technology could have a significant impact on water conservation efforts in arid Syria, where agriculture accounts for about 94% of total water use and about 75% of irrigated lands still employ high-volume flooding and surface irrigation methods. According to a recent World Bank/UNDP study, however, demand for water will exceed dwindling supplies in less than 20 years. Reducing irrigation water use as little as 10% could make twice as much water available for household use. Adritec Syria is the local affiliate of a regional holding company operating in several Arab countries. With the new equity in hand, it is upgrading its existing factory in Latakia to expand its product range into the next generation of water-conserving irrigation products and broaden its market base to more sophisticated agricultural markets in the region. The company intends to develop a new line of drip-irrigation products with pressure-sensitive devices that will deliver water more uniformly over long distances or in uneven terrain. The project is a further sign of Syria's re-engagement with the World Bank Group. In the mid-1980s, IFC had identified a number of potential projects there but had to abandon them when its government stopped repaying its World Bank loans in 1987. Then in 1997 the Bank was invited to negotiate an agreement for the settlement of the arrears, which by then had reached $550 million. Syria has fully complied with the agreement, and it is expected that all arrears will be cleared by September 2002. Although the government cannot seek World Bank loans until that issue is fully settled, the same constraint does not apply to IFC's work with private companies. Indeed, through this environmentally innovative project, IFC is helping strengthen the partnership between Syria and the international community in general, and the World Bank Group in particular, thereby facilitating the policy dialogue on the important reforms that are needed to unleash the full potential of the Syrian economy, and demonstrating through sound investments the advantages of creating a more conducive environment for private participation. Impact X Spring-Summer 2000, Vol. 4, No. 2 VO W;~~~' -/ ! 1 1,4\ r = { / -44OW~~~~~~~~4 <~~~~~ ~~ ~ ~~~~~~~~~~~~~~~~ (4') ) pa a~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~- DJ / (/ . Ia,SNG -CALCe R 1m.:I M2 I S4NoAS2 - . _- .- _ 3<.~~~~~5tef 3!. 1' A. FI.. _ , ~~~Impact - Spring-Summer 2000, Vol. 4, No. 2 I A /hat ould be so important Ldevelopment and expansion otwhat is admittedly a complicated, t w w w ria co l be so i p rtn sophisticatetl inechanlisi IiiOSt oftenl linked with hig,hly devel- about local currency daebt oped markets such as those of the US or UK. But the needs are arkets? tar more related than it miglht first appear. For tbeasy nswer look- nio fLtherthnSoitleastAsiaMn World Bank analysis shows that weak physical infrastructure is one For ith lageasy comanswer, Lir furthllsolderthng Southneasty Asia. e M of the key factors holding India back, especially when it comes to of ItS largest companies are still smoldetring todlay, nearLy thlree yets after financial crisis torched their re . M h of tsharing the benefits of the recent C annual growth more widelv year aftr fiancil crsis orced teir egio. Muh ofthe throu(^hoult its society. And this is precisely where local currency blamne lies with the way they and their hanks had grown corn- t tortable with heavy exposuire -not juist to foreign exchangre bond markets can be so helpful: financing projects for private risk, but to interest rac and refinancing risk atS well. water, power, and transport projects whose own revenutes will also come largely in the form of local currency, and thus run quite a For years many of the biggest, best-known corporate names In risk if they grow too dependnt on foreign borrowings. Thailand, Indonesia, and elsewhere financed their groxvth bv rely- : "Corporate bond markets, with their tong-term institutional ing heavily on short-term US dollar bank loans, alwavs confident investors, help uriteash major forces of savings that can he chan- that their governments would maintain the stable exchange rates neled into important investments in local economic develop- that had so long existed. But the bubble eventually burst. When it ment did, exchanue rates sank to umainab ows, and orrowers soon ulre Hoda, a financial markes specialist at . i-l n ' The likelv lower cost of capital and long-term nature they found it impossible to come up with all the increased amounts ot provide help spur industrial development and bankroll capital- local money suLddenly needed to pay back their creditors. intensive projects to bring wcater, power, or telephone service to those who never had access to. it before." Greater reliance on longer-termt debt instrumnents deno(minated in local currencies wouild clearly have helped fend off thec Experts also welcome the way bond markets can ease the strangle- catastrophes that followed, including the widespread layoffs hold a few powerful local banks often have on developing- that sent unemnployment skyrocketing. But it was barely an option. Throughout the region, local bond markets for the country financial sectors. most part scarcely existed -then or now as a conduit for "A local bond market allows a more efficient allocation of anything bLit government secuirities, savings in that it matches borrowers and savers directly," adds Michalel Petris, a managing director at Bear Stearns in New The debacle in Southeast Asia has sent a sobering message on York. "It reduces the role of banks, which has a number of the evils of Overreliance on foreign borrowing. Yet it also con- important iiiplications. Amtong them is reducinig the potential tains a glimmer of good. "For one thing, it convinced Southeast for political interference in the allocation of credit. Banks are Asian countries like Thailand and Malaysia to build tip their subject to regulation by a country's central bank, and typically local bond markets as a vay to improve risk management and also like to lend fairly short because their funding sources are reduice potential future crises," says IFC's Alison Harwood. very short. But companies' projects are not necessarily short, and maturity mismatches have traditionally been one of the The ongoing fallout from the crisis has had another effect as biggest sources of problems in domestic markets. This is another well. It has also heightened interest in p. 1! IlI, the nascent way local cLirrency debt markets can help." local currency markets of South Asia -the developing world's fastest-growing region over the past twVo years, yet also home to In the handful of developing countries that do have established more poor people (522 million) than any other part of the planet. hond markets of their own, it is not only local blue chips that The goal: introducing both borrowing structures and costs not are the big players. Sometimes, Hoda notes, the big names are offered by bank loans and better risk managemnent and financial joined by important lesser-known names like leasing companies, systems that will provide a wider range of choices overall. which cain recycle the proceeds of their bonds to enable small hbsinesses to rent ouit heavy equipment they can't afford to F or a sense of scale, recall thatt India alone has roughly purchase outright. This can help create jobs and expand the 350 million poor, or more than twivce as many as in all tax base while also encouraging greater investment in the of sub-Saharan Africa. At first glance it might seem domestic economy. Housing finance institutions too are frequent that the giant coLintry and its neighbors have other, local currency issuers, providing local pension funds and other more basic development needs much higher on their to-do lists. institutional investors with attractive securities that in turn Improvements in physical infrastructure, affordable housing, job help expand the supply of mortgages for those seeking to buy creation -all, it would appear, should take precedence over the their own homes. Impact . Spring-Summer 2000, Vol. 4, No. 2 ml Nevertheless, starting up debt markets is hardly as simple as fee, credit rating agencies grade its upcoming bond issue for matching an investor with deep pockets with an issuer with a investors, spelling out stability and ability to repay in clear need for cash. Forging ones that will endure is a slow and terms. The risk-reward ratios they then spell out go a long way painstaking task. in setting borrowing costs and fueling market activity. IFC has helped launch nine rat- ing agencies since 1994, including two in South Asia and one in - ,' v.,, ~~~~~~~~~~~~~~~~~~Thailand. Another in _ ___ -~ , Bangladesh is among an - - ~~~~~~~~~~~~~~~~~~~~~~~~~~~~additional six IFC cur- > r6m)F WIuW m in;A_ rently has under consid- Centml Bmk of Sri LU*A -,u1erationi worldwide. iVcC osF60 &-es k tO-W- But there's one big prob- I ~. g i 0x \ sR ^ | t .;lem with rating agencies: picking the right time to U a w cd ml,~~~~~~~~~~~~~~~~~~~~~ ~introduce them. Debt ''~ ~ 4~iii~ . . .markets need reputable ~~~~~~L* ~~~~~~~~~~~~~~credit rating agencies to MD survive, but then rating agencies need deal flow as well. In other words, 34- 8I - 08.li ____a familiar chicken-and- - ~~~~ .~~~~dLji~~~~~~ 4 ~~~~~ egg scenario -markets need infrastructure to develop, but that infra- 3 8 2 8 4 8 ~ ~~~~~~~~~structure can exist only if 1~~~~~~~~~~~~~~~~ 3 t is supported by at least a minimal level of activi- ty already in place. When starting from scratch, how can you have one without the other? It's a tough one, ond markets are difficult to build," says Harwood. "To a complex puzzle that several South Asian nations are boldly make them work, an economy must produce the right attempting to piece together, using different tactics suited to their kind of issuers and investors, and their attraction will be varying needs and meeting different degrees of success. affected by several factors: macroeconomic conditions, financing alternatives, and market infrastructure components Even IFC has had a taste of this timing ditemma -in Pakistan, such as regulations, trading systems, and credit rating agencies. for example, launch of a rating agency preceded market develop- Even in developed markets, bond trading is limited. But many ment by several years. The country has seen only a sluggish pace developing countries can work toward bond trading and in the of debt issuance since the IFC-backed Pakistan Credit Rating meantime benefit from having well-organized primary markets." Agency (PACRA) issued its first corporate bond rating in 1994. Six years on, the total volume of its local currency corporate Credit rating agencies are an especially important part of mar- debt market remains tiny at 3.5 billion Pakistani rupees ($67 ket infrastructure. Whether linked to global leaders such as million). Even though the basic market infrastructure has been Standard & Poor's, Moody's, or the newly merged tandem of in place and the well-publicized financial troubles of foreign cur- Fitch-IBCA and Duff & Phelps, or even operating on their rency-financed independent power projects have underscored own, these for-profit entities have the all-important task of the importance of the need, little has happened. analyzing the creditworthiness of potential issuers. "Interest in the market has been somewhat modest," admits Their role is essentially the same wherever they operate. After Javed Masud, CEO of PACRA, a joint venture with Fitch- conducting careful analysis of a local company's finances for a IBCA. "This is a case of 'All dressed up and nowhere to go."' *_ Impact . Spring-Summer 2000, Vol. 4, No. 2 Masud attributes the situation to a number of factors that fit the Other countries in the region, though, are several giant steps picture of a country lacking some of the conditions for effective away from this level of activity. But all are starting to learn, market development. Until recently, a high 16% monthly rate both from India's experiences and each other's. Last fall, IFC of return on risk-free government debt served deterred investors convened a landmark symposium in Sri Lanka that brought from dabbling in corporate bonds, setting a benchmark that few together key regulators and market participants from five issuers wanted to exceed. The local economy was also sagging. South Asian countries - Bangladesh, India, Nepal, Pakistan, But things are starting to turn around. Now the economy is slow- and Sri Lanka. ly rebounding, Masud says, and the textile and sugar sectors will look at expansion and modernization, which entail some short- The first meeting of its kind, the session fostered a deeper term debt requirements. The recent drop in government interest understanding of the role the bond market can play in local rates to 12% monthly should also spur renewed interest in the economic development and prompted critical exchanges of bond markets, and regulators have also begun streamlining the ideas, information, and experience between different coun- issuing process and reducing listing and brokerage fees, thus tries and market players. High-level government and banking removing administrative obstacles that have stood in the way. officials, regulators, and market participants used it as a chance to network informally, drafting individual country P akistan may still be in the early stages of local currency action plans to speed the process along. debt market development, but it is not alone. Throughout South Asia, only one country, India, has a Reports from others in Asia who have already begun to build fairly sizable corporate bond market. At a mere 4.3% successful markets, such as Korea and Malaysia, were among the of total GDP, however, it is one with considerable room to grow. most useful inputs. "Emerging-market countries can learn more Tax burdens and an onerous disclosure process have meant that from countries only a step or two ahead of them than from the more than 80% of its bonds are privately placed, even though it US or the UK," explains IFC's Harwood. is generally in the public markets that high volumes of issuance and trading occur. Increases in the national savings base (cur- The Sri Lankans at the meeting have since recommended govemr rently pegged at 20% of GDP), however, indicate there is poten- ment reforms that should ease the way toward a more accessible tial for growth in the corporate market over the next few years. bond market in their country. The recent economic expansion has also spurred the need for new infrastructure financing at levels beyond those that the banks and government debt t T SATATE BANK OF PAK\ IST,7N+1r -r issues can provide. Sf I > It all adds up to a - l \ -- bw; Y new appetite for -. ' corporate bonds. 5 *( = According to 4f-; Usha Thorat of the Reserve Bank of India, the coun- - try is looking to encourage the i Zt=r active trading of bonds, with the government and the private sec- tor jointly examin- ing regulatory reforms designed to It*$JI1SS-jr.--Zc-'fth% it ease issuance and ' other steps to foster liquidity. Impact Spring-Summer 2000, Vol. 4, No. 2 "We all learned a lot from the country case studies that were presented at the symposium," says Ravi Abeysuria, CEO and managing director of DCR Lanka, Sri Lanka's first credit rating agency, incorporated in October 1999 as a joint venture with Duff & Phelps and the IFC. "The proposals to the government (0 1 stem mostly from the experience of those countries." Despite a 1 7-year civil war involving ethnic Tainil and Sinhalese factions that has claimed at least 60,000 lives and scared many foreign investors away, Sri Lanka's business com- munitv has been steadily working with its market-oriented gov- ernment to establish functioning capital markets. Since the local stock exchange opened in 1990, 40 state-owned firms have been privatized and tax incentives put in place to make investment more attractive. Although the country remains Market Makers: Sn Lanka's rupee bond nmarket is growing, with good poor, GDP growth of 6.4"0, and a 17.3% rate of savings indi- analysis available from IFC mnvestee DCR Lanka (above and right). cate a growing ptublic taste for investment. Against this backdrop, DCR Lanka's first rated bond, a RsI.5 billion (approximately $20 million), three-year debenture from priva- It should come as no surprise that the telecom sector was the first tized Sri Lanka Telecom (SLT), was issued in March. Another to move into these uncharted waters, Abeysuria says. The indus- private local telco, SunTel, uwill issue bonds this summer. try has been growing at a rate of 20% a year since the breakup of Corporate Raters Credit rating agencies are a key element of any corporate bond market Their independent analysis makes debt instruments easy for investors to understand, thus improving the pricing and availability of something critical to infrastructure and corporate finance - long-term, local currency funding - that is often scarce in developing countries. With a series of small investrnents in recent years, IFC has helped launch five credit rating agency across Asia. In each case, the process has involved bringing in a respected developed country credit rating agency to provide additional equity, staff training and all-important name recognition. While they can not create strong local currency bond markets in each country by themselves, as time goes on these new companies will be increasingly important in helping them grow. Year, Domestic Corporate Size of IFC Debt Market Country Name Investment Foreign Partner (Current SizeY' Role Pakistan Pakistan Credit 1994, Fitch-IBCA $67 million First in country Rating:Agency $100,000 China Chengx,n International 1999, Fitch-IBCA $3.6 billion First in country Credit Ratings Ltd $360,000 with foreign partner Philippines Thomson Rating 1999. Thomson BankWatch $1.6 billion (mostly short- Second in Philippines $300,000 term commercial paper) country Sri Lanka DCR Lanka 1999, Duff & Phelps $354 million First in country $100,000 Thailand Thai International 2Q00, Thomson BankWatch $3.3 billion Seond-in country Rath Agency $125,000 {Qe40ter one - i1ye she 1 997) A .d … . _4fi- -,&}td, ,> SLT's monopoly in 1997. The South Asian countries in the region have all made varying Expanded service is in great degrees of progress in the development of debt markets. It is demand in a country where something that IFC's Harwood attributes, in part, to the shift waits of seven to eight years toward market-driven economies and a move away from gov- for telephone installation ernment control, particularly in India, Pakistan, and Sri Lanka. X X - _ were once common, and SLT, now owned by a con- Significant obstacles clearly remain, including extensive govern- sortium led by NTT of ment debt, regulatory difficulties, and size of the local investor Japan, needed a cash infu- base. But the work will continue. Greater access to local currency sion since its core market is about to be challenged by other local providers. With local capital controls restricting the kinds of for- D C R Lanka eign borrowings that proved so perilous elsewhere in Asia, Duff & Phelps Credit Rating Lanka Limitec Abeysuria explains, a typical Sri Lankan company in such a sit- uation would apply for a loan from a local bank. But with Rs 28 billion ($380 million) in outstanding bank debt, the company's access to local lenders was also restricted by borrowing limit reg- ulations, making the new bond market an attractive alternative. The transaction was in many ways a bellwether of the greater use of local capital markets to finance infrastructure projects that experts have long called for but rarely seen -even in X many higher-iincome countries. Looking ahead, Abeysuria believes that an established debt market will have a significant impact not only on investors, who will have greater portfolio diversification opportunities, but on the average Sri Lankan, for whom the cost of housing loans will decrease as the mortgage market grows and securi- funds will allow companies to grow, . rctcatlng- I.-'b, mnd adding to tizes. Pakistan's Masud concurs. Housing, he says, will become the tax base. And the quality of life for the average citizen 'k III increasingly affordable with debt market expansion, particular- improve through affordable housing, a greater variety of savings ly in his country, where purchasers are generally required to opportunities, and economic expansion. "The cultivation of local pay the entire cost of the home up front, in cash, and without currency debt markets will help these countries help them-nel% e;," access to loans. says IFC's Hoda. H It'" I" 0* l2GU 558746 RESEIRVE BAl OF INDIA *URAMTURD BY WLE C . eovwu Tq r % TUESM WCAI .U1I WflA fVT R,EE OF 2GLl 558746 *OR Impact . Spring-Summer 2000, Vol. 4, No.2 2i , ouw2!b~~~~~~~~4 o ,_41 y,t,, ,,* W > =5 0 c2 . N 1; r--t-X - - :_zA -,>-" , _4TD ',t- <+ _*' * '-f'1 / t g -."' \ ' x5N,:_,r,Am :~~V W i~ 0 C g < :N B- t t t ) >~~~~~~~~~~~~~~~~~~~~~~A Maurice Desthuis-Francis, IFC Technical and Environment Department PARTICULARLY IN TIMES OF DRAMATIC AND WRENCHING SOCIAL AND ECONOMIC CHANGE ACCELERATED BY GLOBALIZATION, THE WELL-PRESERVED HISTORIC CITY REPRESENTS A SOURCE OF STABILITY, OF CONTINUITY, OF PERMANENCE, AND OF THE FAMILIAR - OF WHERE WE'VE COME FROM AND WHERE WE ARE. AND IT RECOGNIZES THE IMPORTANCE OF PUBLIC SPACES AND PUBLIC LIFE IN BUILDING A SENSE OF COMMUNITY AND CONNECTEDNESS." - HAROLD WILLIAMS, J. PAUL GETTY TRUST "SUSTAINED GROWTH IN ARRIVALS IS NO LONGER THE MAIN CRITERION. WHAT IS NEEDED IS A FORMULA TO PROTECT THE ENVIRONMENT, ENSURING THAT TOURISM BENEFITS THE LOCAL POPULATION AND HELPS PRESERVE THE CULTURAL HERITAGE OF DESTINATION COUNTRIES. - EUGENIO YUNIS, WORLD TOURISM ORGANIZATION tIw t ~A I ith its clcar ability to gen- for many countries, even more lucrative - and the figure could be erate jobs, hard currency, as much as ten times higher. However calculated, it is a total that VV i.and tax revenues, inter- is likely to increase by a factor of three over the next 20 years national tourism is something of great through the powerful combined punch of globalization and rising h. - interest to developing countries. It is incomes. And therein lies an essential challenge for developing also an industry where two essential countries: how to participate in this remarkable growth industry, components of sustainable develop- but in ways that help preserve - not destroy- the best things ment - market forces and the drive about their cities? to conserve local culture - meet in * - dramatic interplay. Tourism can bring many benefits to cities. Often the first investment of this kind in a given urban area, whether in new a <[ w more than one day made to any foreign location anywhere, Frequently this transformation takes place through a process of n - E , whether for business or pleas- changing ownership patterns. New investors sense an economic ure, its annual revenues cur- opportunity to be seized, seeing that a given neighborhood is rently exceed $500 billion. underpriced in relation to its potential. Additional private Add in the earnings from expenditures in renovation and maintenance then add further purely domestic travel- value, both to the quality of life and to the property. Such A Bridge Too Full: Summer tourists mob Prague's historic Charles Bridge. When is enough enough? Impact * Spring-Summer 2000, Vol. 4, No. 2 SE. . processes, usually carriedi out primarily occur. Seeing historic centers choked at street level and sliccd by market forces and without much by elevated roads, many might say the city's downtown has fa11- government support, can reverse en to nothing but a staging post for tourists embarking on a trip clecline and enable a neighborhood to up the Nile or making the compulsory visit to the great national become self-sustaining, free from extensive museum. Its timeless character compromised by urban sprawl, Oft Js --need for public ftunds. Cairo now sometimes alienates many of its visitors, who for their part also help to make local life all the more unplcasant. ^ TIl, se are all trends that IFC, with its $500 Bangkok, however, is perhaps an even stronger example of this - I,,,l!~~I on portfolio of toUrisin-rclalted proj ects, has unenviable evolutio)n, with its remarkable temples andi pag odas r -1 e,ntly observed. Hotels such as the Bristol in separated from visitors by infamous gridlock. Beijing too is often -- - s .1. Lw, the Metropole in Hanoi, and the Polana citedz as an example of a priceless city now threatened with the in Mozambique's capital of Maputo -all rehabili- loss of much of its distinctive trrditional character. This phenom- r J tated with IFC financial help - are just some that have enon, though hardly restricted to developing countries, makes it contributed to urban economic revitalization, all the more r l Ii for them to establislh a viable tourist industry And if the situation is had today, how much worse might it he When accomplished , I t, , I I, this process of rebirth can in 20 years, when tourism triples? infuse historic urban centers with a new hope of survival on cul- tural terms as well. It gives communities much-needed revenues to Proceed with Caution polish up their infrastructure and restore the architectural achieve- If not properly mancaged, tourism can do dalnage to an urban ments of times past. This form of urban renaissance, in turn, strikes setting's prospects for lonoer-terti recovery. Despite its economic something in us that transcends the immedliate physical context. benefits, it can contribute to environmental degradation andl the loss of local identity. The revenues that flow in may help "Conservation of cultural heritage anLd the historic city is repair a historic building or two, but do little for the run-down inevitably essential to sustainable development," says Harold district in which they stand. The area may remain a poverty Williams, president emeritus of California's J. Paul Getty TrLst, trap, leaving residents with n) choice, no way to escape. an active partner in the preservation of Quito, Ecuador, and other urbnLt architectural treasures around the world. "It recog- Take the c.ase of Soweto in South Africa. Created as a temporary nizes the importance of cultural continuity and of human history labor camp for the Johannesburg mining industry in 19 31, this in nourishing a sense of social cohesion, a sense of self, of southwestem township of 2 million inhabitants, where a third of belonging, and of place in a context in whichi to understand the the living space is in the form of squatter shacks, is now a tourist past anid contemplate the future." athraction in itL own right Nelson Mandela's and Archbishop Tutu's former homes are prim and proper, and local ... I,. i, , ' But how' is it done? houses are exuberant in their display of wealth, bur the "tours" do not venture down the shantytown alleyways. A historic urkan Stopping to Consider center, yes, but can its physical fabric be maintainedi meaningfully, It is no wonder that developing countries are eager to maximize without relief for its striving poor? their tourism potential. The trouble is, as wyith any business venture, some serious risks lurk in the far corners of this vibrant scenario. Even those who live and do business comfortably in a historic district may find themsclves out in the cold if they are there for To begin with, tourism is a volatile industry. It has unpredictable the tourist alone. Though the common interest fares well during ups and downs that are difficult to buck in a world where con- good times, difficult times may bring decline. Such a deteriora- temporary tastes are constantly changing. This can play terrible havoc with the heavy initial capital expenditure typical of tourist enterprises. As a great deal of literature on the subject also points out, tourism's impact on destinations is not all posi- rV_ tive. The overcrowding that tourism brings to the beautiful sites of Rome, Paris, or California's Yosemite National Park in peak - season is a grim reminder that the industry all too often neglects to pay attention to the "carrying capacity" of a destination. Although the choice of developing-world examples here is wide, Cairo seems to epitomize the distress that can easily Impact . Spring-Summer 2000, Vol. 4, No. 2 tion in the built environmrient can occur quicklly in tourism- W here the Tourists Go dependent economies. Lacking diversity, they may be unable to respond to changing needs. The celebrated city of Marrakesh in While none draw as well as the world leaders (the US, France, Morocco runs such a risk todav as some tourist-populated Italy Spain, and the UK), some developing and transition Tucn,iltone Tiso s tof economies are now major destinations. Here are the top 10: Tuiscan hill towns may In the fh-ture. This is otten how rundown historic districts got that way -through the disappearance of Country 1999 Tourism Receipts their narrow economic base. ($ billion) Sao Paulo typifies the problems of the loss of a historic center. China* $21.1 The Brazilian megacity's core sits in a low area, near the Mexico $7.8 Metropolitan Cathedral, 1,11 ' visible signs of decay. Russia $7.7 While neither on any world heritage list nor on many travelers' Thil 1.a,rd $6.6 * must see" itinerary, it is exactly the sort of district that can he Argentina $5 S revitalized. Why? Because beneath the decay there still lies the Korea $5.6 stuff of urban living. Unlike other city centers that have been Turlkey $5 0 overtaiken by time and lost their cultural anchor, Sao Paulo's Brazil 34 -1 still has both an economic base and a local identity. Hence its Egypt 33 8 potential for redevelopment is strong. Czech Repuiblic 33 5 Increasingly, however, we are coming to understand that if the Soircz LorId Tounrnn Orearn,zatior huge but fragmented global tourism industry has an adverse ifldzJIi Ho% Kong effect on local ecosystems or societies, it can also destroy the very basis on which it is built. For this reason, the World Bank for developing countries. The environmental and social issues Group recently joined forces with the World Tourism that need to he addressed are best debated and reconciled in a Organization and UNESCO to promote a l 1,1. form of political arena. BtIt it is not always possible to resoive those tourism that meets the requirements of socioeconomic develop- issues in early investments if the government (local or national) ment without sacrificing oLur global environment and our world does not have the expertise or democratic means to facilitate cultural heritage. This presents an opportunity for IFC to seek such debate. Otit nexv ways to foster sustainable private investment in tourism amd to partner with the activitics of these other global bodies. To put all these matters in a somewhat more concrete perspective, consider a project IFC has financed on the exotic Tanzanian island of Zanzibar. Preserving the Core C_-- A $1.3 million IFC financing package helpcd launch a hotel g * - _ that has now been operational for two years in Zanzibar's cap- ital, Stone Toxvn. Its principal investor is Serena Hotels, a 'leader in the safari industry and part of the Aga Khan = - - Foundation for Edtucation and Development - a group deeply ' -~ involved in the work of preserving and restoring Stone Town. Public finance is insufficient to bring about the changes that a'.. #.. z will secure the physical integrity of the town, which, despite its name, consists primarily of white stuccoed facades. Stone Dynamic Tension: Heavy traffic (above) and high-rise hotels ts Zanzibrs oriartlr It habe caled "the onl (left) box up Bangkok's beauty ~Tou,n Is Zanzibar's old quarter. It has been called "the only (left) bOX UP Bangkcok's beauty functioning historical city in East Africa," containing a fortress, two sultans' palaces, two cathedrals, several colonial Investors in tourism must heed these wvarnings. One of their mansions, and a Persian-style public hathi. All contribute to a central tasks, as in most capital investments with a physical rich and enduring heritage. dimension, is to strike an acceptable balance hetwveen the pos- itive and the negative impacts of a given undertaking an(d Stone Town is the cultuLral heart of Zanzibar, little changed in the determine how to mitigate the worst effects. This adds yet past 200 years. It is a place of winding alleys, bustling bazaars, another layer of comiplexity to the tourist investment process mosques, and grand Arab houses whose original owners jostled to Impact a Spring-Summer 2000, Vol. 4, No. 2 Urban Treasures creating and maintaining physical space to conduct business, and It takes a special place to make UNESCO's list of World generating public money through taxation. Heritage Sites, a designation that gives cultural and natural The Zanzibar Serena Inn project involved the careful restoration wonders of "outstanding universal value" limited inter- national protection. Included are these ma/or cities. How and rehabilitation of two historic buildings, in the process creating long will they last under growing tourist pressure? a top-quality hotel. One, known locally as the Chinese Doctor's City Country Residence, is an old Arab house, a place where missionary and CitY %.OUfl try explorer David Livingstone once stayed in the 1870s and that later Brasilia Brazil became the British Consul's residence. The other, called the Dubrovnik Croatia Extelecoms Building, is more recent, solidly built in the nine- Prague* Czech Republic teenth century and definitely, by design and construction, a Santo Domingo* Dominican Republic "colonial" building. It is an attractive complement to the other Quito* Ecuador major architectural influences: from Omani Arabs (whose Sultan Talinn* Estonia Seyyid Said made Zanzibar his capital in 1832) and Indians Budalin* Hungary (traders and artisans that the suLtans brought from the subconti- Budapest Hungary nent). The local people then absorbed these and other diverse Riga* Latvia influences, from them developing their own unique Zanzibari style. Vilnius* Lithuania Oaxaca* Mexico With 51 rooms, the Zanzibar Serena Inn is the largest hotel in a Kathmandu Nepal town with 400 rooms to offer its visitors, as well as 15 restaurants Panama City* Panama acceptable to the international traveler and a plethora of Cuzco, Lima* Peru antique, curio, and arts and crafts shops. Taxis and tour operators Cracow*, Warsaw* Poland await those wanting to explore the town and island. The airport St. Petersburg* Russia needs improvement but adequately handles the current flight Aleppo Syria schedules, and the even more adventurous can travel to and Istanbul* Turkey from mainland Dar es Salaam via high-speed boat. Lviv* Ukraine 'a In short, sufficient tourism infrastructure is now in place to Historlc district oly make Stone Town a "destination" rather than merely a faint -I- t t = - >3@ remembrance of a colorful historic past. In the travel industry, L t f ~~ - 2 Eii6tsf Old Stone Town and Zanzibar are together being crafted and r. 's C y molded through multisegmented imagery to be seen worldwide _ - V | - i2F~-!S = ;npF3 on CNN TV travel shows. Glossy brochures depict color, spices, ja ' - . ~yr3W. ~-' and other delights waiting to be "discovered." ZanzibsThough privatization and newly embraced tourism race to rescue - , . * * r , V . ugh . Zanzibar's capital from physical disintegration, it is still a city -- __S:,, ' ~ ~ (~ t living on borrowed time, even with a Stone Town Conservation and Development Authority (ZCDA) in existence. As this agency's director, Ahmed S. Ahmed, said not long ago: "Before g-~~= + - we took over, you'd think twice before going into Stone Town. E Dubrovnik -roi:'(is A/i a,- ,, F.,l.lu1!,',_ were just falling down, especially in the rainy season. We lost lives. That's when we suggested to the government we '- " ^ should sell some of those buildings to private individuals. This is outdo each other in the extravagance of their dwellings. Most of what saved is." the houses that can be seen today had been built by the nine- teenth century, when the island was one of the most important Ultimately the ZCDA sold more than 300 buildings, mostly to Indian Ocean trading centers. But today it is tourism that will tenants and at about 20% of market value. This has proved an create the revenue to provide for and update its physical infra- excellent complement to the foreign assistance that has con- structure. Private investment, both direct and indirect, must centrated on renovating the main historic buildings: the Aga ultimately pay for the upkeep and rehabilitation of the historic Khan Foundation took on a waterfront landmark, the United (as well as the contemporary) city by providing employment, Nations has restored the Customs House a few meters away, * Impact * Spring-Summer 2000, Vol. 4, No. 2 and along the seafront, the Saving the Cities European Union has assumed Cte responsibility for the most monu- Great cities reflect great cultures. Their unique identities are prized assets the world dare not lose. But to endure for the long haul, they must balance their tourism potential and mental building left by the sultans, sustainability. the House of Wonders. But few such sources are available to restore Threat of Decline Source of Preservation the bulk of the smaller buildings Tourism's Pressure Points Ci 's Response that are in private hands. Although A individually they are of less historic * Crowds: trol the rate of change value than those favored by foreign Density and focus donations, collectively the houses CITIES * Balance short-term revenue donatios, colectivey the ouses Traffic- gains with need for long- rising along the narrow back streets Flow. patterns, and term sustainability are what define the character of disruption S Stone Town. Will a rehabilitated - * Pollution.=1, social benefit urban fabric still provide a home A Pollution and - scl and livelihood for those who give it Arwae,ndase 1*Reinvest earnings to the cultural and contextual mean- a Loss of maintain a future ing that attracts the tourist in the Local identity. business - first place? It is the question that diversity - and La Par. Heart of the Andes. must be answered if this unique affordable accommodation cultural asset is to survive, for Zanzibar is simply too far from the main feeder markets to survive as just a museum town. adding value to the site, creating jobs, and in many other ways helping to boost economic development. Preservation Zanzibar is a time capsule: a destination previously bypassed, Still, the flows of people to these sites must be managed in ways despite the phenomenal rise in tourism around the globe. that do not alienate, diminish, or destroy the object of atten- Political circumstances, ideology, and too often war have pre- tion. That would be counterproductive in the extreme, destroy- vented many sites of this sort from building a viable tourism ing the very thing that we are trying to preserve. industry. Many attractive sites have yet to be fully connected to the global transportation network, being too remote from Europe But what exactly is this entity called 'historic district" that has and the Americas, the main concentrations of potential visitors. become the object of our affections? Is it one of the lovely oases Some would argue that this remoteness is actually a blessing- in the center of many European cities that was once an urban that it allows cultural treasures to escape the ravages that tourism pleasure ground -a theme park surviving from the seventeenth can sometimes bring. Herein lies the paradox that those with a century, though its origins are long forgotten? Or is it an entire vested interest in tourism must at some point confront. zone reconstructed from war-damaged rubble, as in Warsaw and Budapest? Though the latter may be little more than elaborate On one hand, most of the world's major tourist sites, such as facsimiles of their former states, the cultural reference that they Disneyland or the great game parks of Africa, depend on rev- make transcends the architectural. enues to survive. But whether the theme of a site is drawn from myth or reality, buildings will need preserving, attractions will The term historic embodies not merely a simple notion of the pas- have to be repaired and maintained, and money be set aside to sage of time. Being old is not what counts. It is being significant. allow for expansion into new areas or lines of business. This is no different from most historic districts, religious or secular. Think of Siena, Carcassonne, and Bamberg. They are among Westem Europe's greatest living monuments to mankind's Gifts and endowments have, in part, preserved Oxford and achievements and manage their tourism well. With their wealth of Cambridge, the Vatican, and Mecca, and state financing has led architectural and urban continuity, they can evoke a deep to the upkeep of public buildings. But most historic districts are response, even in those oblivious to the historical context. What rehabilitated and maintained through the forces of the market- stirs us is the personal experience the immediate comprehen- place. Even the state subsidies and grants that provide some sion -of the cultural significance of these and other intact urban funding often come from the tax base that tourism generates. centers. They are the embodiment of human life in all its dimen- All the while that it is building those revenues, tourism is sions, having a special meaning that enriches our day-to-day lives. continued on page 29 Impact . Spring-Summer 2000, Vol. 4, No. 2 Client Perspectives | ~~~- U, - or.- . !Ih X *f^ - - @ .trom Chorebank is not just any bank. In fact, there may not be another one in the United States likeit Run in an inner-city Chicago neighborhood by a long-serving management team, it is a small financial services holding. company with a kick like a mule. Its key unit, South Shore Bank, is the economic centerpiece of one of the most successful . examples of neighborhood revitalization in urban America. a ' For the past 27 years, Shorebank has made a square-mile scrap of the notoriously tough South Side of Chicago the center of its : operations. The difference from surrounding neighborhoods could- --e n't be more stark. Drive ten minutes away, and you will see all the hallmarks of the ghetto: crime, drugs, abandoned buildings. Places that don't work, where the family unit has broken down, where South Side: Across the street from Shorebank headquarters. there is nothing to be proud of. Where the rat-infested public has helped turn around its neighborhood of 80,000 low- and housing projects are such colossal failures that they are set to be middle-income residents. It has done so by investing in the torn down at considerable government expense. Places of despair. community, using a rigorous business-driven approach to devel- opment that directly echoes World Bank and IFC President But stay where Shorebank (www.shorebankadvisory.com) calls James D. Wolfensohn's belief that "people do not want charity home, and you'll see something different: people of modest means -they want a chance." with homes and jobs they cherish. Attractive storefronts, carefully maintained properties, people rushing to get to work or home to When he was running for president in 1992, Bill Clinton said, their families. In other words, a community. "We need to create a small-business entrepreneurial economy in every underclass urban area and rural area in the country It's no accident. By carefully combining for-profit (mainly small through the use of banks like South Shore Bank." But how? business lending, real estate development, and housing finance) There aren't many others set up the same way. Shareholders are and nonprofit (research, job training, business support services) not profit-maximizers, but rather an odd combination of major activities and the hard-earned trust of local residents, the bank financial institutions, wealthy individuals, charitable foundations, Pk- Impact a Spring-Summer 2000, Vol. 4, No. 2 Bottom-Up Banking Name: Ron Grzywinski Title: Chairman and CEO, Shorebank Corp., Chicago, Illinois, USA - 8 3i Size: $1 billion in assets Objectives: "Build wealth among low- and moderate-income households; help small business grow and create more jobs; improve the physical and economic condition of neighborhoods." Background -* > * A lifetime Chicagoan, he first led a group that bought a troubled bank in U $ , the rough neighborhood around the University of Chicago in the late 1960s i and revived it, in large part through successful minority lending that earned a national reputation. * Next he brought key members of his management team on board for a new venture, and in 1973 raised $800,000 equity, then borrowed three times that much to buy another weakened institution in a dying area that soon became the flagship holding of Shorebank Corp. * Conceived as a development bank from the outset, Shorebank had a slow start, with consistent profitability taking 8 years to achieve. Rapid growth has led to increasing success ever since. * Shorebank began working in developing countries in 1983 as a consultant to microfinance pioneer Muhammad Yunus of Grameen Bank, Bangladesh, and has since transferred its US experience to more than 15 countries. Annual Investment Volume: More than $100 million IFC Partner in: Azerbaijan, Georgia, Kenya, Romania; other possible collaborations under consideration in Bangladesh and India Philosophy: "Everyone, except the bumblebee itself, knows that a bumblebee can't fly. Its wings are not large enough. Aeronautics declares it is scientifically impossible. But what does the bumblebee do? It ignores the great minds, the skeptics, the computers. And it just goes ahead and flies." and religious bodies - all coming togeth- would become global leaders of microfi- every day back in the Windy City: er to make a difference, whether at home nance, Bangladesh's Grameen Bank and taking a risk on high-growth-potential or abroad, and committed to doing so in a BRAC. It was also among those pioneer- entrepreneurs in underserved markets, way that makes enough money to ensure ing small business lending in Poland and then finding ways to support their growth long-term sustainability. Russia in the early 1990s, when the transi- through disciplined, cash flow-based tion to market economies was still at lending. That's what Impact learned when teeing the parallels to its own mission, square one. As Helen Dunlap, head of con- it spent a day with CEO Ron Grzywinski, S IFC began working with Shorebank in sulting arm Shorebank Advisory Services a man with 19 stamps in his passport 1997, partnering with it in an $8 million says, "We're a 27-year-old bank that likes from Bangladesh and a never-say-die Romanian small business lending program doing things for the first time." spirit uniquely bred on the streets of the whose repayment rate has since been city of Michael Jordan and Oprah almost perfect. By then the Chicago insti- Working with IFC in the Caucasus Winfrey, of Studs Terkel and Howlin' tution already had 15 years of developing- republics of Georgia and Azerbaijan (see Wolf -the one Carl Sandburg so aptly country experience behind it, including box, p. 24) requires Shorebank to use called "City of the Big Shoulders." extensive early work with two groups that many of the same basic skills it applies Impact Spring-Summer 2000, Vol.4, No. 2 Impact: Your ownership structure is stock. But on the other hand, we are a reg- the state treasurer of Illinois' offer back unique, combining both for-profits like ulated financial institution, so we have to in 1966 to make a deposit of $1 million Bank of America and nonprofits like the organize ourselves in a way that generates in state funds in another bank I was Ford Foundation and the United Church profits, and we do. That's what has always president of if we would get into minori- of Christ. How do you run a bank that made the job fun - having to serve both ty lending. We were interested in build- makes money every year, yet still keeps masters simultaneously. ing deposits and getting banks more everyone on your board happy? immersed in their communities. Impact: You've certainly been successful Grzywinski: Our shareholders are at it. Here's the question everybody must Impact: What economic potential did incredibly patient. They invest with a very ask: what is the secret of your success' you see in the inner city that others didn't? clear sense that they are reaching develop- ment objectives, not trying to maximize Grzywinski: Who knows -I sure Grzywinski: Our first week in business profits, because even though we do pay a don't. We just saw an opportunity and at Shorebank we started off with hous- small dividend, there is no liquidity for our thiings went on from there, starting with ing,, ,ff . r i! - uninsured mortgages to Business as Unusual such as preparation and evaluation of business plans, cash flow analysis, and loan documentation, administration, and monitoring. As a result, TBC Bank in Tbilisi is learning to finance people like the Three years ago IFC was looking for ways to help in Georgia and owners of a local coffee shop where, analysts say, "the atmosphere Azerbaijan. At the time both countries were not only still reeling makes one feel cozy" - and sales are currently running four times from the ravages of communism, but also recovering from regional ahead of projections. and internal wars and natural disasters. Their financial institutions were extremely weak, almost completely unable to finance the The IFC-Shorebank teamwork has allowed local banks to make local entrepreneurs who held the keys to economic growth. A loans averaging about $40,000 in size at market rates and maturi- business-as-usual approach - offering the banks small business ties of anywhere from five to 30 months to 125 small companies lines of credit without government repayment guarantees - would - many of which had never before practiced the financial discipline be an unacceptable risk. necessary to obtain commercial financing. With repayment rates strong, the program is starting to expand into other areas like Shorebank happened to be eyeing entry to the Caucasus at just the housing finance. But this kind of grassroots private sector develop- same time, seeking to manage a US Agency for International ment did not come easy. IFC needed a partner like Shorebank Development-funded small business development program. Seeing working in the local banks to give it the confidence needed to a perfect partnership opportunity, IFC offered to finance local lend. Yet as a commercially oriented institution with limited access banks if the Chicago institution would help manage them and train to donor funds, IFC could never have collaborated with Shorebank their staff. A deal was struck, and Shorebank began sending long- at the level necessary in these countries without funding from the term, Russian-speaking resident advisers in early 1998. They have extensive USAID grants. The result, says IFC's Mark Rozanski, since helped build local skills in key areas of credit risk management "is a win-win deal for everybody." IFC Banks in Local SMEs $10 million in long-term Georgia, Azerbaijan 125 subloans market rate loans Take full repayment risk Move to formal sector - 6 USAID $6 million grant FF, Impact a Spring-Summer 2000, Vol. 4, No. 2 hard-working, stable families, even Not all of them do. We tried though no other bank would. These were very hard to develop microlend- IV, good people with good incomes who real- ing in Arkansas, for instance. But ˘ - -- ly wanted to own their homes, and we on the whole it was not success- saw a lot of pride involved. It wasn't hard ful. Nevertheless, we still do --- -- to find some we could believe in. somne strange things. For example, . - we're the largest financier of s Impact. Looking back, what would you Pakistani-owned Dunkin' Donut consider your biggest achievement? shops in the city of Chicago. That was never in anybody's -- Grzywinski: Our biggest achievement is plan. It just came up, mainly that we saved our neighborhood from because we saw it was something going down. We had very little capital that nobody else was doing. when we started, but we had to save our We've been able to make a nice In Business: Entrepreneurs in Georgia (above) and little business out of i. Azerbaijan (left) are going at it, financed through IFC/Shorebank small business lending program. Impact: It seems completely rF i [ | ] i a # '; natural for Shorebank to have made the been a partner of ours from the very begin- i i ^ f w ~~~~~ - _ ~ leap to working in developing countries as ning. We spent a week in the villages well, despite all the things on its plate here leaming and listening, and eventually -_,, .in Chicago. What was the reason for it? served over a 10-year period on a donor Not many bankers are consortium that provided Grameen with Grzywinski: Not many bankers are something like $170 million. - gIl i 4 w 8, < really interested in doing this stuff. Even ' s - t fewer have experience lending successfully Impact: Last question. From all your U 1111111-^ in difficult markets. experience in low-income parts of neighborhood. We felt this way even Chicago and some of the world's poorest though many of the self-appointed Impact: Tell us how your work overseas countries, what would you say it takes to experts said it was inevitable that our began. lift people out of poverty? whole area would be demolished and abandoned, just like the other neighbor- Grzywinski: It started in Bangladesh in Grzywinski: I wish I knew. To be honest, hoods surrounding us. 1983, with 10 days talking to Grameen that one reminds me of the famous saying Bank. Its founder, Muhammad Yunus, of H. L. Mencken's, which was something ' - ' Why? would always say "I'm an economist, not to the effect of "For every complex ques- a banker," so we just went over and tion, there is an answer that is simple, Grzywinski: This city is very racially talked to him about banking. No one else direct -and wrong." But I guess what our- divided. There was enormous suburban on those other early donor missions to selves and a lot of other organizations development and "white flight" going on Grameen was from the banking industry, around the world are doing is trying to at the time. All the money was going so we were able to bring a perspective expand the boundaries of opportunity for out, not coming in. Most people saw that no one else had on certain funda- people, especially in creating more spaces very little hope. mental issues, like whether the financial where people lower down the economic projections would work. ladder can gain access to resources, Impact. But even if you started as a whether in the fonn of money or knowl- housing finance institution, Shorebank is Impact: What exactly did you do there? edge. What we do is really no different much more than that today. What else do than what microfinance groups like you attribute your success to? Grzywinski: We first visited Grameen Grameen in Bangladesh and Acci6n in the day after Yunus had received his bank- Latin America do, which is stretch the Grzywinski: Well, we've also been able ing license. He was pretty sure he could limits of xvhat people can do, then let them to attract some really great people to make it work, but wanted a US or Indian do their own thing. Increasingly though, work here over the years. We give them a banking partner that could help him with I'm finding that what poor people need is lot of freedom -maybe too much some- the technology and management issues. So access to knowledge, not just money. times - but nevertheless a lot of freedom he approached the local office of the Ford to try new things and see if they work. Foundation, which knew us well, having -Rob Wright Impact * Spring-Summer 2000, Vol. 4, No. 2 itl Transparent WA A} p ~V r fi n r h--cl.@e ai.l 2..., fi ' i Erik D'Amato ike their peers in other targe cities leaving the final outcome acceptable to . 8 throughout Central and Eastern all. For proof, took only to the Bolivian - _Europe, the municipal authorities of city of Cochabamba, where private con-. Bucharest often face the problems of both cessionaires International W1ater Ltd. of : J the developed and the developing worlds. the UK and Abengoa SA of Spain saw While their constituents have long their recent government-approved 35% r enjoyed near-universal access to water, rate increases lead to a nightmare, trigger- sanitation, and other essential public ing riots that led to six deaths, the tempo- Handshake: Bucharest Mayor Viorel Lis and services, often it has been at heavity sub- rary imposition of a nationwide state of Cyril Roger Lacan of winning bidder Vivendi. sidized rates and through an infrastructure emergency, and the companies' sudden that is crumbting and in need of substan- ouster from an agreed $200 million, 40- drinking and wastewater standards are tial new investment, year project in which they reportedly had relativety high, but not being met. It was already invested $10 million. a major challenge to bring the capital A need for greater efficiency and account- city's water first up to that stated level, ability in pubtic administration, coupled Such were the dilemmas the Romanian then on to those of the European Union with chronically weak public finances, capitat faced three years ago when it (EU), which Romania expects to join makes reform of existing municipal insti- decided to tackle the many shortcomings later this decade. But with an average per tutions essential. But while the involve- of its own water and wastewater utility. capita income of just $1,400, Romanians ment of the private sector in the provision Although almost all of Bucharest's 2.3 simply could not afford any large hikes in of such services promises more investment mitlion people had access to the city's utility rates that might be considered nec- and greater efficiency, an uncertain water and sewerage services, th-e systema essary to bring about these iraprovmenienu. investment climate and the rough-and- had long ago fallen into a sad state of dis- tumble of potitics in an emerging society repair. Half the water pumped through With these challenges in mind, in 1997 can conspire to make such public-private the city's 2,700 km of pipes was being lost municipal authorities began examining partnerships next to impossible. It is to teaks, and broken meters and weak the possibility of contracting with an becoming clear that these transactions administration meant that nonpayment experienced private firm to take over the can succeed only if properly structured, of water bilts was endemic. Romanian operation of the Bucharest Water Impact a Spring-Summer 2000, Vol. 4, No. 2 Authority, using IFC as their adviser. This Enescu, the Bucharest lengthy and complex process came to an deputy mayor who end on March 31 of this year, when the served as head of the city signed a 25-year concession agreement evaluation committee enabling Vivendi Water SA of France to setting the guidelines for ' operate its water and wastewater services. the bidding. "The whole I Turning the system around is expected to process was conducted require the French company to invest in an open and profes- several hundred million dollars over that sional manner. The - _ time period. concession was awarded at a public session, and there were no com- ' _ While Bucharest is not the first city to plaints from those who IJ. contract with a commercial entity for didn't win." , such services, and Vivendi will not assume _ __ -X . control of the utility until July, the trans- Such high credibility was _. action is already widely considered a necessary, Enescu and r success. For one thing, Vivendi's winning others say, given that bid was more attractive than even the other similar attempts at most optimistic projection of many city public-private partner- officials. Although it required an initial ships in the region'sg increase in the tariff in real terms of about poorer countries' water 15°/o on averaue over the tife of the con- sectors have been 15° on average over the life of the con- sectors have been Retrofit: Bucharest's water infrastructure will get a major cession, it represented a combined water delayed, derailed, or seen upgrade with privatization. and sanitation tariff of roughly 11 US their results contested. cents per cubic meter, or 35% beloxv the existing rate. This 11 cents, it should be "It could easily have added, excludes the cost of building new been the object of debates and political bidders before the formal bids were made. water and sewage treatment plants, whose interventions," says Costin Berevoianu, The bids themselves, unsealed on March cost will he added to the prevailing tariff the general manager of the Bucharest 20 in front of an audience of almost 100 if and when the plants are commissioned. Water Authority. "Therc needed to bc pcoplc, includcd only legal documents an automatic selection process, without affirming the bidder's acceptance of the Perhaps more important, a novel form of room for subjective differences." prenegotiated contract, and a proposed engagement with all the competitors for tariff. Besides Vivendi, two others submit- the contract meant that Romania's first To Michele Positano, the leader of IFC's ted complete bids: Intemational Water of major experiment of this kind was also advisory effort on the project, the privati- the UK and France's Suez Lyonnaise des extremely fair and above board. Although zation's high degree of transparency and Eaux. Azurix, a division of energy-focused a demanding turnaround process, it competitiveness was partly the result of a US multinational Enron, dropped (iut at attracted avid interest from most of the decision by the municipality to forgo the the last minute because of a change in its world's private water industry leaders- industry norm of multicriteria technical regional strategy. despite the need for substantial new invest- competition requiring a great deal of sub- ment in a country where Standard & jective decision making on the part of bid "Everything was absolutely specific, down Poor's gives the government's finances a evaluators. Since that approach can be to the last comma, before the bids were risky B- credit rating and the respected vulnerable to exploitation, the Bucharest made, meaning evaluation was based on watchdog group Transparency bidding was instead based solely on price, one indicator, price," Fositano says. "The International finds corruption to be a once competitors had established their bidders submitted signed contracts, so major deterrent. competence through a rigorous prequalifi- there was no negotiation after the award. cation procedure. And while the contract It was a 600-page document cast in stone, "This transaction was, and is, very impor- signed with Vivendi holds that company prenegotiated over the past year. Everyone tant, because it created a model for the to clearly defined service improvements bid on exactly the same legal basis. The transfer of public services into private and investment timetables, such details outcome was a bid that over the next five management in Romania," says Dumitru were prenegotiated with all qualified years will on average be 15% higher than Impact * Spring-Summer 2000, Vol. 4, No. 2 . the existing tariff, but over the life of the criterion bidding process entailed several January 1998 concession is projected to be on average difficult decisions. IFC nanied adviser to proposed privati- 35% lower than the existing tariff, subject zation of Bucharest municipal water always to any extraordinary tariff increas- One involved removing from inclusion in and sanitation system. es and other adjustments provided for in the tariff bid the capital cost of two new, March-September 1998 the contract. This is something that is large treatment plants. IFC and the diligencember 1998 affordable for the citizens of Bucharest." municipality jointly determined that Duline and preparation phase culminates In IFC's privatization strategy inclusion of these projects would reduce report. This phase included an investors' Jean Patrice Poirier, director for Eastern transparency of the tariff bidding and conference, an international study tour Europe at Vivendi, says that while his could increase the risk of tariff renegotia- of privatized water systems for a high- firm may have preferred a multicriteria tion. The completion of the Crivina water level delegation of Bucharest municipal contest, the single-criterion requirement treatment plant is now subject to the officials, and a customer survey and was highly successful. "We found the agreement and approval of a specific tariff consumer focus group session. rules very clear," he savs, adding that adjustment. The completion of the Glina the efficacy of the process was demon- sewage treatment plant is expected to be October 1998 strated by the gap between his firm's bid largely financed by a capital grant from Publc presentation of IFC's privatiza- tlOn strategy To maximize fairness and and that of the runner-up, International the European Commission, with the rest transparencV, IFC recommends a 25- Water. "We didn't know we had the best coming from the concessionaire subject to year concession awarded to prequali- bid; we only knew what services we had a specific tariff adjustment. fied bidders solely on basis of tariff, to provide. And now we know where we with the eventual new private operator have to go." Under the terms of the concession, to assume full risk. Vivendi and the municipal authorities will have to agree on the tariff adjustment December1998 Prospective bidders were not the only par- needed to complete the construction of Bucharest Municipal Council approves ties brought into consultations with the the two projects, which could eventually IFC's strategy and preparaton of the municipality before the concession bids. draw significant financing from Brussels. privatization tender. With the help of IFC and a labor consult- But aside from these projects and standard January-April 1999 ant, a "social plan" was prenegotiated with performance reviews, the victorious Launch of international tender process relevant labor unions and the Water French firm "cannot propose any changes with prequalification and opening of Authority's existing management. While or modifications that would change the data room. Six prestigious foreign firms it does not cover all contingencies - and spirit," says Berevoianu of the Water meeting all ownership and control, reform of the utility will likely result in Authority. technical, and financial criteria are pre- some layoffs - when coupled with a qualified (Azurix; Anglian Water; International Water; Suez Lyonnaise promise to give employees the chance to Trying to create a concession contract des Eaux; Thames Water; Vivendi). buy 10% of the utility at below-market rigid enough to protect all parties' inter- rates, the plan is believed to have provid- ests yet flexible enough to accommodate ed an important basis for stability during any future changes in circumstances the transition to private management. without requiring renegotiation took That meant not only no strikes, but also more than a year of consultations and labor's general acquiescence to the privati- negotiations. It also required numerous strongest in the industry. In other words, zation. Taking a senior delegation of rounds of comments from the bidders quantity and quality. Romanian officials, including the heads of and potential lenders. And it was subject the water utility's labor union, on an to clearance by state bodies responsible "For the tender to be valid, we needed at international tour of privatized water sys- for tariff regulation and competition least two valid bids," recalls Positano. "But tems was an important way to inform the issues. The final document was our key challenge was to make sure we had client of the positive results that could be approved by the municipal council in three strong bids, and preferably four." expected from transferring the Bucharest mid-December, drawing support from system into private hands. both governing and opposition parties. The competition was officially launched in March 1999, attracting eight interest- But the crafting of the bidding process But that was not the only necessity. ed investors. Six of these were preselect- was critical as well, According to Another was balancing the need for sev- ed to offer final bids: the final four Positano, engineering an effective single- eral bidders with a desire to attract the (Vivendi, Suez Lyonnaise, International FT.- Impact X Spring-Summer 2000, Vol. 4, No. 2 July-November 1999 than any other private company in the Tourists & Cities Preparation of bidding documentation, world. It has been operating in other continued from page 21 including three rounds of bidders' com- parts of Romania since 1991, part of a As yet, similar examples of successfully pre- ments on the drafts and a bidders' con- global experience base in the manage- served historic districts in IFC's countries of ference. ment of municipal water systems that also operations are hard to come by. Take the December 1999 includes high-profile concessions in example of Prague: with its proximity to Bucharest Municipal Council approves Berlin, Mexico City, and much of both major sources of free-spending foreign visitors the bidding documents, including con- the Czech Republic and Brazil. The and a remarkably pressured historic district, it cession contract and regulatory month following its win in Bucharest, has become a victim of its own success. arrangements. Vivendi also signed another 25-year con- Tourists swamp the town for many months cession contract for water and wastewater a year, and while their needs are catered to, February 2000 services with Ploiesti, a city of 250,000 how are the ordinary residents faring just a Bucharest Municipality launches some 60 km north of Bucharest. few streets back from the main historic "Appel d'Offres, " requests bids from thoroughfares? prequatified bidders. Deputy Mayor Enescu credits the T a m (I There are.manyin;,sr1ice-s in rniddle- and:. . March 2000 "patience" and "tenacity" of IFC with lower-income Countries ,f cor.*ervtion. Bid submission, opening, and award. helping make a protracted and complex .s-'le t rehabilicanon But aC far as Three prequalified firms (International process more manageable. "Over two pr0ven wustainapilitv ot the urban setting Water, Suez Lyonnaise des Eaux, and years, all the questions that were raised t: es. there ir lurtle to report. Part ci the Vivendi) submit final bids. Evaluation with IFC found answers. And in addi- prublern i, the lack of necessarn re'enue. committee constituted by Bucharest tion to its help with documentation, The publLc sector simplty cannot afford to deputy mayor and municipal councilors IFC had an important role at the carrv out all the work, and private sector open and evaluate the bids and, based national level." torces mav not vet be developed enough to on its tariff bid, name Vivendi the win- handle the task. Furthermore. polkcvmakers ner. Three days later the municipal Positano says the successful tender in emeTging economies who are often unac- council ratifies the evaluation commit- dostates tha sparendef stometoing the issae in adm tee's evaluation and formally awards demonstrates that transparency and efh- custored ro debiting the Issues in a deio- the concession to Vivendi. One week ciency can go together. "You can have craric political arena or to opening their later Mayor Viorel Lis signs the conces- transparency, and if you have strong com- counitry's industries to the privaw secvo sion contract with Vivendi. petition with two or more players you can must recognize rhat tourism itself Is a marke, have extremely competitive results. This and a very efficient one at that:, process created a precedent and model for privatization in Romania, for the water They also need to recognize that -thi. pr.e n . . -' sector in other countries, and for other p can pla a impOrt3 ue i n ; ' sectors as well." E distinctive city cennteem . 1bW. ,,1,' t all, ~~~~~~~~~~~iS anb essetial step ifone, iW -hU s ,, Ir;"! tourist viEdwrr to begir n "W - them for J,eopk to both 801ii:-' to be -peo behs 4 city -enes ias ii pf ia l Water, and Azurix), plus i' - 'i.) vesii ntin) i 1 . eventual dropouts Anglian --tof. ' , Water and Thames Water , of the UK. "The preselection' process was designed to have only partners with strong - backgrounds," says - Berevoianu. "Now, looking back, we see the qualification criteria were correct.". - The new operator, Vivendi, pro- u ' - i v'ides more water to more people - IFC International Finance Corporation 2121 Pennsylvania Avenue, NW Washington, DC 20433 USA www.ifc.org IFC is a member of the World Bank Group supporting private sector development in member countries through investment, advisory services, and technical assistance. Our Mission To promote private sector investmient in developing countries, which will reduce poverty and improve people's lives.